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Exam 10: Relevant Costing for Managerial Decisions

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Question 61

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A cost that cannot be avoided or changed because it arises from a past decision, and is irrelevant to future decisions, is called a(n) :

A) Uncontrollable cost.
B) Incremental cost.
C) Opportunity cost.
D) Out-of-pocket cost.
E) Sunk cost.

F) B) and E)
G) A) and B)

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Question 62

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Bluebird Mfg. has received a special one-time order for 15,000 bird feeders at $3 per unit. Bluebird currently produces and sells 75,000 units at $7.00 each. This level represents 80% of its capacity. These bird feeders would be marketed under the wholesaler's name and would not affect Bluebird's sales through its normal channels. Production costs for these units are $3.50 per unit, which includes $2.25 variable cost and $1.25 fixed cost. If Bluebird accepts this additional business, the incremental cost will be:

A) $45,000.
B) $11,250.
C) $38,750.
D) $7,500.
E) $33,750.

F) All of the above
G) A) and D)

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Question 63

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A company has just received a special, one-time order for 1,000 units. Producing the order will have no effect on the production and sales of other units. The buyer's name will be stamped on each unit, at a cost of $1.50 per unit. Normal cost data, excluding stamping, follows: Direct materials…………………………… $ 10 per unit Direct labor……………………………….. 16 per unit Variable overhead………………………… 4 per unit Allocated fixed overhead…………………. 12 per unit Allocated fixed selling expense…………… 8 per unit Prepare an analysis that indicates the selling price per unit this company will require to earn $3,000 on the order.

Wade Company is operating at 75% of its manufacturing capacity of 140,000 product units per year. A customer has offered to buy an additional 20,000 units at $32 each and sell them outside the country so as not to compete with Wade. The following data are available: $\begin{array} { | l | r | r | } \hline \text { Costs at } 75 \% \text { capacity: } & \text { Per Unit } & { \text { Total } } \\\hline \text { Direct materials } & \$ 12.00 & \$ 1,260,000 \\\hline \text { Direct labor } & 9.00 & 945,000 \\\hline \text { Overhead (fixed and variable) } & \underline { 15.00 } & \underline { 1,575,000 } \\\hline \text { Totals } & \$ 36.00 & \$ 3,780,000 \\\hline\end{array}$ In producing 20,000 additional units, fixed overhead costs would remain at their current level but incremental variable overhead costs of $6 per unit would be incurred. What is the effect on income if Wade accepts this order?

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Bannister Co. is thinking about having one of its products manufactured by a subcontractor. Currently, the cost of manufacturing 1,000 units follows: $\begin{array} { | l | r | } \hline \text { Direct material } & \$ 45,000 \\\hline \text { Direct labor } & 30,000 \\\hline \text { Factory overhead ( } 30 \% \text { is variable) } & 98,000 \\\hline\end{array}$ If Bannister can buy 1,000 units from an outside supplier for $100,000, it should:

Additional costs incurred if a company pursues a certain course of action are sunk costs.

Markson Company had the following results of operations for the past year: $\begin{array}{|l|l|cc|} \hline \text { Sales (8,000 units at \( \$ 20) \) .................................... } & & \$160,000\\\hline \text {Variable manufacturing costs.............................. } &\$86,000\\\hline \text { Fixed manufacturing costs................................. } &15,000&\\ \hline\text { Variable selling and administrative expenses....... } &12,000\\\hline \text {Fixed selling and administrative expenses............ } & 20,000&(133,000) \\\hline \text { Operating income................................................ } & & \$27,000\\\hline\end{array}$ A foreign company whose sales will not affect Markson's market offers to buy 2,000 units at $14 per unit. In addition to variable manufacturing costs, selling these units would increase fixed overhead by $1,600 for the purchase of special tools. Markson's annual productive capacity is 12,000 units. If Markson accepts this additional business, its profits will:

A company has already incurred a $55,000 cost in partially producing its three products. Their selling prices when partially and fully processed are shown in the following table with the additional costs necessary to finish their processing. Based on this information, should any products be processed further? $\begin{array} { | l | c | c | c | } \hline \text { Product } & \begin{array} { c } \text { Unfinished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Finished } \\\text { Selling Price }\end{array} & \begin{array} { c } \text { Further } \\\text { Processing Cost }\end{array} \\\hline \mathrm { A } & \$ 72 & \$ 108 & \$ 35 \\\hline \mathrm { B } & 83 & 124 & 42 \\\hline \mathrm { C } & 94 & 141 & 45 \\\hline\end{array}$

Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $5 each. Chang's production manager reports that the defects can be corrected for $6 per unit, enabling them to be sold at their regular market price of $21. The incremental income or loss on reworking the units is:

If accepting additional business would cause existing sales to decline, the offer should always be declined.

Maxim manufactures a hamster food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The hamster food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. The incremental revenue of processing Green Health further into Premium Green and Green Deluxe would be:

A company has the choice of either selling 600 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $2.00 per unit. Alternatively, it could rebuild them with incremental costs of $0.60 per unit for materials, $1.00 per unit for labor, and $0.80 per unit for overhead, and then sell the rebuilt units for $5.00 each. What is the amount of incremental income (loss) from rebuilding?

A company has the choice of either selling 1,000 defective units as scrap or rebuilding them. The company could sell the defective units as they are for $4.00 per unit. Alternatively, it could rebuild them with incremental costs of $1.00 per unit for materials, $2.00 per unit for labor, and $1.50 per unit for overhead, and then sell the rebuilt units for $8.00 each. What should the company do?

Incremental costs are also called out-of-pocket costs.

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $3,000. The division sales for the year were $1,050,000 and the variable costs were $860,000. The fixed costs of the division were $193,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

Gordon Corporation inadvertently produced 10,000 defective digital watches. The watches cost $8 each to produce. A salvage company will purchase the defective units as they are for $3 each. Gordon's production manager reports that the defects can be corrected for $5 per unit, enabling them to be sold at their regular market price of $12.50. Gordon should: